The Fed is slowing down. After seven rate hikes last year, the US central bank hiked rates 25 basis points on Wednesday at its first meeting of the year. A slower pace compared to previous increases, due to the slowdown in inflation. Overnight rates, which influence the cost of all other credit, are now in a range of 4.50 to 4.75%. A year ago, they were at zero. However, the rate hike is far from over. The Fed is indeed planning “several additional increases”, said its president Jerome Powell on Wednesday and, he hammered, there will be no drop in 2023.
An announcement that allowed Wall Street to end in the green on Wednesday. Nervous ahead of the monetary decision, the tech-heavy Nasdaq climbed 2.00% and the S&P 500 1.05% while the Dow Jones returned to stability (+0.02%), according to reports. provisional results at closing.
This increase of 25 basis points marks a return to the usual rhythm, after increases of half a point and even three-quarters of a point, unheard of for nearly 30 years.
“Insofar as we were starting from rates close to zero in the spring, it was necessary to act quickly. (…) It seems to me that it is now time to slow down the pace, without stopping it”, had warned, on January 20, Christopher Waller, a governor of the Fed.
Inflation is slowing down
Because the effects of rate hikes are not immediate, they take months to be fully felt. These increases in turn drive up interest rates on loans, whether they be mortgages, car loans, or even consumer loans. This reduces the purchasing power of households, which by buying less slows down demand and eases the pressure on prices. This is bearing fruit: inflation seems to have stopped its mad escalation in the United States. It fell in December to 5% over one year against 5.5% the previous month, according to the PCE index, favored by the Fed. This is good news, but it is still well above the 2% that the monetary institution. Another measure of inflation, the CPI index, on which pensions are indexed, also showed a sharp slowdown in December, to 6.5% against 7.1%.
Several experts expect stabilization. According to Nancy Vanden Houten, an economist for Oxford Economics, a final quarter-point hike is expected at the next meeting on March 21-22, which would see rates peak at 4.75-5%, “before the policy does not stabilize over the rest of the year”. Because consumption is the engine of the American economy. So be careful not to stall it and fall into recession.
For their part, currency traders (professionals who buy and sell currencies) are counting, in their central scenario, on a last rate hike in March, by another quarter point, which would constitute a peak of this cycle. Even though Jerome Powell says there won’t be a cut this year, they also expect at least one rate cut, possibly two, in the second half of 2023. For Jerome Powell, this divergence of view “is largely because the market expects inflation to slow faster” than the Fed expects.
“Hope for a soft landing remains, but its previous results in this area are not encouraging,” said Oren Klachkin, also an economist for Oxford Economics. The gross domestic product (GDP) of the United States recorded growth of 2.1% for the whole of 2022, the Commerce Department announced Thursday. The job market, meanwhile, remains solid, with an unemployment rate of 3.5% in December, still one of the lowest in 50 years.
Euro briefly hits $1.10, highest in 10 months
The euro rose sharply against the dollar on Wednesday, briefly reaching the symbolic threshold of $1.10, its highest level in almost 10 months, after the announcement of the decision of the American central bank (Fed), which raised its key interest rate by a quarter of a point.
The move came despite statements by Fed Chairman Jerome Powell, who said he expected “several additional rate hikes” in the coming months, a sign that monetary tightening is set to continue.
The single currency rose to 1.1000 dollars for one euro, a first since the beginning of April 2022. Around 8:35 p.m. GMT, it was displayed at 1.0996 dollars, up 1.22%.
During his speech, Jerome Powell held a speech of firmness, affirming that “the task (was not) finished” in the fight against inflation.
“It would be very premature to declare victory,” insisted the central banker. However, currency traders were cautious about the extent of the monetary tightening still to come. The reaction of the bond market also reflected the vision of investors. The yield on 2-year US government bonds, considered to better reflect medium-term monetary policy expectations than the 10-year rate, plunged to 4.12% from 4.20% at the close on Tuesday.